The Myth of Competitive Balance

There once was a time, back when there was no need to specify which world war you were referring to, when the fullback was the most important position in football. Owners actually bid against each other for fullbacks. I like to imagine everyone present at these bidding wars looking more or less like the Monopoly Man, disputing the preponderance of the forward pass the way present-day offensive coordinators debate the viability of the read-option.

During this time, two teams decided they desperately wanted a specific fullback with a boxer's physique and a nickname to match: Stanislaus "Stockyard Stan" Kostka of Fargo, N.D. The football Brooklyn Dodgers and the Philadelphia Eagles engaged in a bidding war for the fullback's services. The owner of the Eagles at the time was Bert Bell, who lost out to the Dodgers and their $5,000 bid. In an effort to promote competitive balance, Bell worked feverishly the following season to institute the reverse draft known to American sports today.

Bell wouldn't need to bother with any bidding war to get the top talent the following year: Due to the Eagles owning the worst record, combined with the first-ever reverse order NFL draft, he would have his pick of the country's collegiate stars in 1936.

It may be the simplicity of hindsight that makes Bell's fortune seem to unfold as such a tidy coincidence. History is rarely a direct line, and it's impossible to know how much the Stockyard Stan affair influenced Bell in the decades forward. It's equally impossible to know whether commissioner Bert Bell in the 1940s and '50s kept Stan Kostka's statuesque shadow in the back of his head when he lobbied to embed revenue sharing initiatives in television contracts, or when he created the TV blackout rules that still haunt fans in this very-different digital landscape.

What is certain, though, is Bell's name is irreversibly tied to the commonly held belief that competitive balance is essential to the financial success of professional sports. Likewise, Bell's legacy is synonymous with the antitrust exemptions that enable American sports leagues to restrict their labor markets in order to institute salary caps, reverse order drafts, revenue sharing and luxury taxes. Bell is but one of a long, unbroken chain of league commissioners who extol the virtues of parity and insist fans will not be interested in sports if these measures are not in place.

We will probably never know if Bell's early lobbying victory influenced him for the remainder of his life, shaping American sports' politics and finances for the remainder of the century. What we do know, though, is he was wrong in almost every way.

The need for competitive balance is a myth: Fans will watch leagues without it, and even if they didn't, there's precious little evidence that leagues can do anything about it. There is one thing salary caps, revenue sharing, reverse-order drafts and luxury taxes do quite effectively: They transfer money from players to owners, increasing league profitability.

There was one other thing Bell was wrong about: As for the square-jawed talent from Fargo, Stockyard Stan played in nine games for Brooklyn during the 1935 season, compiled 258 yards from scrimmage and exited professional football after the season without ever having scored a touchdown.

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Roger Goodell, in the midst of a labor dispute in 2008, responded to a question from a fan about the future of the salary cap by saying, "The goal is to keep the competitive balance of the league." Gary Bettman -- in between wryly mocking fans for crawling back to the league after the most recent lockout -- believes (incorrectly) the NHL's competitive balance is "the best in sports." That title is actually owned by the NFL. David Stern presides over the least competitively balanced league, but he believes the most recent labor agreement will "level the playing field" by redistributing more than $200 million from large markets to smaller market teams.

If this all sounds vague and circular to you, that's because the concept of competitive balance is purposely vague. League commissioners and owners have rarely proposed their own clarifying definitions. The closest we have come was the Bud Selig-organized Blue Ribbon Panel On Baseball Economics to analyze the economic structure of Major League Baseball, which concluded: "Proper competitive balance should be understood to exist when there are no clubs chronically weak because of MLB's structural features. Proper competitive balance will not exist until every well-run club has a regularly recurring reasonable hope of reaching postseason play."

There are two separate but key concepts here to keep in the back of your head: That competitive balance is a function of the league's policies, and that if a club is well-run, it has a reasonable hope of basic success.

"The reserve clause was introduced into baseball in the 1880 season as a way to control player salaries. Subsequently, it was incorporated into all other major American sports leagues … the reserve, or option, clause in a player's contract essentially binds the player for his entire playing career to the owner of the contract."

That is all simple enough: Owners wanted to pay players as little as possible, and in the pre-trust-busting era, they were able to get away with quite a lot. But look at what happens when that collusion is challenged:

"Over time, as the reserve clause faced court challenges, owners of sports teams developed the argument that, whatever the consequences of the reserve clause on players' salaries, it was needed to preserve competitive balance. Owners argued that free agency would allow the richest teams to acquire a disproportionate share of the playing talent in the league. Competitive balance would be destroyed, driving weaker franchises out of business."

Indeed, in Toolson v. New York Yankees (1953), the reserve clause was challenged and upheld in federal court, because leagues are a single entity "amusement" with the primary purpose of entertaining the fans, which ostensibly requires offering a competitive product for each and every game. Of course, this competitively-imbalanced dystopian vision owners painted of a free-agent system was not all that different from what they actually had under the reserve clause. In "Those Damn Yankees: The Secret Life of America's Greatest Franchise," Dean Chadwin wrote of the true effect of the reserve clause on competitive balance:

"The reserve system had always been justified by the owners as necessary to maintain competitive balance. In fact it has enabled the best teams to squirrel away talented players in the minors where they can serve as insurance in case of injury, and more importantly be kept off the rosters of potential rivals."

Even though the reserve system was largely a mechanism for the richest clubs to hoard talent and restrict labor costs -- the very opposite of competitive balance -- the argument had proven a worthy tool and received federal sanction.

That argument has evolved over time to fit the needs of each league, but it has generally been claimed that increasing competitive balance will also increase fans' interest, getting them to attend more games and spend more money, thereby raising profits for the league. Today, the most discussed tools to promote competitive balance are concerned with keeping the top clubs from spending too much: salary caps, luxury taxes and revenue sharing.

Each league has its own particulars, and many fans are misled with anecdotal evidence into believing that these measures affect competitive balance. The NFL, which has the most restrictive salary cap and most socialistic revenue sharing agreement, has the most competitive balance, whereas Major League Baseball was mired in controversy during the 1990s because of a few rich clubs dominating, combined with the lack of salary cap or revenue sharing arrangements. To many, the evidence seemed apparent enough: Small-market teams couldn't afford good players, and therefore couldn't compete without some league policies to distribute revenue or prevent the big clubs from spending too much. Owners no longer needed ammunition to argue in federal courts against trust-busters, but rather against player unions fighting for a larger slice of the pie. The concept of competitive balance is a timeless weapon.

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The first thing owners do to convince others that there is a competitive balance issue is to focus on the number of teams winning championships. The Blue Ribbon Panel mentioned above began its report by declaring, "[from 1995-1999] no club from payroll Quartiles III or IV [the lower half of the league] won a DS [Division Series] or LCS [League Championship Series] game, and no club from payroll quartiles II, III or IV won a World Series game." Aside from a woefully inadequate sample size and problematic methodology, this is a fundamentally flawed way to measure parity.

"Playoffs are not a scientific experiment of any sort," sports economist David Berri of Southern Utah University and author of "The Wages of Wins" told me. "Especially in something like football, that's purely a crapshoot. It is very much the same thing in baseball, because seven games is not enough time to determine who the better team is." Sports economist J.C. Bradbury of Kennesaw State University makes the same argument in his book "Hot Stove Economics": "In a best-of-seven contest, the inferior team would still be expected to emerge as the champion 40 percent of the time. It would take 23 games for the inferior team to have less than a five percent chance of winning more games than the superior team." The randomness of postseason play makes for an enthralling spectacle, but it isn't a sound argument for whether a league is competitively balanced.

Rather, the preferred method of measuring competitive balance is looking at the distribution of wins over time. When sports economists do this, they almost invariably find that salary caps, luxury taxes and revenue sharing have no effect on competitive balance. John Vrooman found in his 1995 study that salary caps ironically promote competitive imbalance because it allows the league to behave as one entity, rather than each team acting as an individual firm. Once a league is recognized as a single economic entity, it (shockingly) starts acting like one, and that isn't good from a competitive balance perspective. Once MLB, for example, is a single entity, it's primarily concerned with the health of the entire league. So it institutes policies that may shuffle money around to make unprofitable teams profitable, but it doesn't mandate they become more competitive, as has been the case with the Pittsburgh Pirates, who have (until recently) been lousy on the field for two decades, and yet quite profitable off of it.

But Vrooman's work was admittedly theoretical. For more analytical work, Martin Schmidt and Dave Berri conducted a 2001 study that analyzed competitive balance using a traditional measure of equality, the Gini Coefficient, to measure the relationship between attendance and wins in baseball. To their surprise, they found the 1990s were actually the most competitively balanced decade in baseball history, and there had been a steady trend in that direction for decades. The Gini Coefficient has its problems and limitations, but it's also not the only measure to come to the same conclusion. In his aforementioned book, Bradbury used the Noll-Scully Measure of competitive balance -- which uses the relationships between the average number of wins per team, the number of teams in the league and the number of games each plays -- to measure MLB's historic competitive balance. He found very much the same results as Schmidt and Berri: "Competitive balance today is about what it was in the 1980s, and it's the best it's been in the league's entire history. Recent attempts to improve competitive balance with policies such as revenue sharing and a luxury tax don't appear to have had much effect." Likewise, Berri stated unequivocally in a 2011 blog post: "We found that none of these institutions [salary caps, luxury taxes, etc.] had any statistically significant impact on balance in any of these leagues [NBA, NHL, NFL, and MLB]." These are but a few of a hostofstudies echoing the same conclusion: league policies don't affect competitive balance to any measurable degree.

These data-driven analyses put the competitive balance narrative in perspective. Competitive balance is a nebulous red herring, one that cannot be properly identified by those who purport to be concerned about it. And even if competitive balance was a real concern, wins have never been distributed more evenly -- even before salary caps or revenue sharing were put into place.

The term itself is a clever verbal ploy, because it's juxtaposed with "competitive imbalance," which naturally steers the mind to assume a certainty of outcome. But sports rarely, if ever, have a complete certainty of outcome, ESPN Classic excepted. Even in the most unbalanced league, the best team almost always loses some games (thank you, 2007 New York Giants) and the worst teams almost always win some games (damn you, 2008 Detroit Lions). What the competitive balance debate really entails is probabilities of winning. Along those lines, as long as there's at least a slim probability of either team winning, fans remain interested.

To illustrate this point, Berri pointed out to me the amount of fan interest in the first two rounds of the NCAA tournament or regular season college football, two venues of runaway competitive imbalance, yet also two of the most popular American sporting spectacles. We watch sports for a multitude of reasons, one of which is to witness the improbable. (While on the subject, you rarely hear NCAA officials pining for greater competitive balance, perhaps because their labor costs are already zero.)

When I spoke to Bradbury, he was unequivocal in his belief that the need for competitive balance is a myth. "If there was no uncertainty of outcome, yes that would be a problem for revenue. But we're nowhere near close to that point. So when owners say, 'look we don't have competitive balance, if we don't win more no one is going to come, therefore I need salary caps so that I can afford to pay players as much money,' that's really just a PR argument to try and hold down labor costs."

Similarly, when I sent Berri an interview request via email, he politely accepted, and then succinctly post-scripted, "And yes, [competitive balance is] entirely a myth!"

"It is the case that if you went to a game and you knew exactly what was going to happen, you're not going to find it very interesting," he said. "But that's not what we're talking about when it comes to competitive balance. Even though we know the Heat are better than the other teams, there is still a chance that they could be upset. And as long as there's a chance of that happening, we have an interest in the outcome."

Fans care about competitive balance to the extent that we don't want games to be fixed (and, I suppose, to be cognizant of the fix). But this isn't saying much, and the data doesn't support much else.

It's easy to imagine tormented fanbases caring deeply about competitive balance. Indeed, Berri's 2001 study cited above backs them up. It seems fans care about competitive balance to a statistically significant degree over three- and five-year stretches, implying fans don't mind waiting until next year to see their team win as long as every year doesn't become the proverbial "next year."

But remember the Blue Ribbon Panel's definition of competitive balance: "… when there are no clubs chronically weak because of MLB's structural features. Proper competitive balance will not exist until every well-run club has a regularly recurring reasonable hope of reaching postseason play" (emphasis mine). As the data has shown, clubs aren't weak because of a league's structural features; they're weak independent of what structural features leagues implement. In fact, the definition itself is circular. A well-run club can, by definition, field a competitive team by finding labor market inefficiencies to exploit. There have been far more small-market clubs able to do so than those that have lost money in any given year over the past three decades. "Moneyball" is the most obvious, culturally relevant and sexy example here, but it's hardly the most important.

Every year and in every sport, teams hire students straight from graduate school into their analytics departments, and the Sloan Sports Analytics Conference keeps metastasizing with eager khakied wannabes waiting to be called up to their own corner of the major leagues. Yes, the rich teams are hiring, too, but that's not all that important. The whole point of the statistical revolution is to properly value players based on what they contribute on the field, which is largely independent of market size or team revenue. Forget Hollywood's portrayal, the statistical revolution hasn't been about rich teams versus poor teams; it's about not overpaying, which is what salary caps and luxury taxes have been trying to prevent. In some ways, advanced statistics are accomplishing what lockouts, luxury taxes and salary caps have been attempting for decades. One of the reasons these league policies haven't affected competitive balance is because spending more money on players than they're worth isn't a good strategy for winning games.

To be fair, there is one measure leagues can implement that Berri acknowledges helps competitive balance. During my research, I came across a study that analyzed the effect the 1993 Collective Bargaining Agreement in the NFL -- the one that implemented the salary cap and expanded free agency -- had on competitive balance. In a major oversight, it assumed all the positive effects of competitive balance were due to these mechanisms, not one other implementation in that same CBA: the salary floor, or the mandatory minimum spending on players each team had to meet per year.

The Buccaneers are a prime example: Forced to spend money on players, their record drastically improved, going from hapless day-glo orange laughing stock to perennial .500-plus contender. Of course, the Buccaneers didn't become a top-spending club, and Tampa Bay didn't suddenly evolve into a booming metropolis. They were simply forced to spend money on players.

Similarly, reverse-order drafts are often -- but not unanimously -- believed to increase competitive balance, although to what degree is often contested. This is because -- unlike revenue sharing which simply shuffles money around -- drafts reallocate talent. But teams always have the choice of "selling" that talent for more prospects and picks as that talent demands higher salaries in future contracts. If the team is only interested in profits, this won't help it improve on the field.

However, salary floors don't come with that option. Teams simply must spend money on players, so they might as well try and do it on good ones. This is further evidence the competitive balance argument is circular: If the only universally effective league policy is one that forces Monty Burns-esque owners to actually, you know, spend money on players, then policies that artificially restrict player salaries cannot help competitive balance.

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Salary caps and revenue sharing accomplish very calculated and important goals for league offices with massive payoffs, the same goal they've been fighting for since the inception of the reserve clause more than 130 years ago: to systematically lower player salaries. In 2003, Rodney Fort published a theoretical work showing that redistributing revenues from rich teams to poor teams will make winning less valuable for all teams, and therefore make labor less valuable as well. What he showed was that if the benefits of winning (money) are spread out more evenly, then everyone has less incentive to win and therefore will spend less money on players to try and win.

In a 2007 study, John Solow and Anthony Krautmann used the aforementioned Blue Ribbon Panel's data on MLB clubs pre-revenue distribution to create a model to estimate what player salaries would have been without the redistribution. They found that "[revenue] redistribution lowered [player] salaries by approximately 22 percent without affecting league balance." A 1998 study by the Bureau of Labor Statistics examined the four major U.S. sports, and found, "Salary caps and payroll taxes may seem beneficial to owners, but their effects appear to be more symbolic and cosmetic than fundamental."

That study also observed that the ratio of the salary cap to the average salary in the NBA fell during the late '80s and early '90s, when the league saw its revenue increase dramatically (must have been Horace Grant). The NBA had (and still has) a soft cap, which suggests that increased revenue was not being passed on to the players in the way it would under unrestricted market conditions. Typically, under unrestricted markets, if a league's revenue grows, owners will then have more money to spend on talent, whose salaries will rise as well (MLB and European soccer have seen this occur). But under the NBA's capped system, revenue growth outpaced salaries. So even though the NBA can claim player salaries grew in absolute terms, they didn't grow as fast as league revenue, and it's very likely players would have earned more under an uncapped system.

However, to understand that salary caps restrict labor costs, one needs to look no further than the name itself: It is a cap on salaries.

If salary caps and revenue sharing don't affect competitive balance, what does? Berri had a simple answer: "Outcomes are determined by talent and luck." Since luck is, by definition, outside of human control, competitive balance is affected by the size of the talent pool the league is drawing from. The biggest changes to competitive balance happened during major supply shocks, such as integration in baseball, or widespread scouting in other countries.

In his seminal paper, "The Short Supply of Tall People," Berri articulates this argument right in the title in intuitive fashion as it pertains to the NBA. The NBA has been the least competitive league for some time because there are only so many athletic seven-footers, and there's nothing a salary cap or luxury tax can do about that. Those seven-footers (or the select few transcendent talents such as LeBron James or the unparalleled Andrea Bargnani) can be shuffled from team to team, but there will always be a few teams with them and many without.

But this made me wonder why we don't hear European soccer leagues talk more about competitive balance, even though they draw from a global talent pool. Berri's answer was the simplest one he could give: It would be illegal for them. You see, those darn socialists in the European Union make their sports leagues abide by all the same labor laws as every other industry: You can't own the rights to a worker before he signs a contract, you can't collude to determine how much money you will spend on employee salaries in order to artificially lower their value, and you can't penalize each other for spending too much money on employees.

(Some might counter this point by gesticulating feverishly at Financial Fair Play (FFP), which is basically an initiative to stop clubs from going into massive debt by signing players to heaping piles of money. FFP won't allow clubs to transfer money to each other, and it doesn't stop clubs backed by wealthy sponsors/oil billionaires/conglomerates/actual countries to simply even out the club's finances with their own pockets. On the contrary, it will likely widen the gap between small and large clubs, since smaller clubs, almost by definition, don't have wealthy backers to boost their bottom line, and they won't be permitted to take financial risks to climb the standings. Financial Fair Play is, in sum, very similar in spirit to what we have seen in the United States: a way for leagues to ensure clubs don't lose money, and not much else.)

The other wrinkle European soccer offers is the promotion and relegation system, combined with qualifying for lucrative tournaments based on the end-of-season standings, which keep fans interested in contests aside from the top of the standings. Beyond that, it creates a compelling incentive for most clubs to get results, lest they face the stiff financial penalty of relegation or not qualifying for an international tournament. This adds intrigue to contests that might be competitively imbalanced, in the American sense, because the bottom of the standings matter just as much (if not more) than the top.

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Maybe this would all come as a shock to old Bert Bell. On his deathbed, a doctor advised Bell not to watch football because his heart was too weak. Bert replied, "I'd rather die watching football than in my bed with my boots off."

Perhaps it was just an instance of macho braggadocio, or maybe Bert cared more about the game than any of us, and he genuinely believed in this competitive balance thing. Maybe, he'd look around today and see that the modern game is about so much more than what happens on that precise rectangular turf, and recognize the need to allow those other aspects of the game to play out just as freely as the physical sport he loved so intensely.

Then again, as commissioner in 1958, Bell took a more heavy-handed approach to the reverse-draft idea he invented some 25 years before, this time with coaching talent. Hoping to improve on the Green Bay Packers' last-place finish, Bell contacted Jack Vainisi, their personnel director, regarding the team's head coaching vacancy. Bell recommended an assistant coach on the New York Giants with a flair for the authoritative by the name of Vince Lombardi. With help from the league office, Lombardi took the job, and went on to accomplish a few things. Upon reflection, I think Bell would be pretty pleased with how things turned out, and would probably buy David Stern a brandy for coining the phrase "basketball reasons."